Aggressive Down Payment Requirements Being Considered for Mortgages

3 08 2011

As measures are being taken to correct and stabilize the distressed housing market, Federal regulators are proposing a new qualified residential mortgage (QRM) rule that would greatly impact the qualifying power of prospective home buyers.  The new rule proposes to impose a minimum 20 percent down payment, rigid debt-to-income ratio requirements and strict credit standards in an effort to restrict mortgage loans to “qualified” homebuyers.  The National Association of Realtors (NAR) has asserted that this rule would harm the economy and deny millions of Americans access to secure, low-cost mortgages.

This proposed definition of qualified residential mortgages (QRM) would impose higher interest rates and fees on mortgages that are consider non-QRM.  NAR states that this will lead to making home ownership more expensive or unattainable for many prospective home owners.  For this reason, NAR has urged regulators to withdraw the proposed risk retention rule and consider alternative options.  NAR submitted a comment letter to regulators offering a host of suggestions.  Since non-QRM loans generally consist of higher mortgage rates and fees, NAR recommends that regulators define QRM as including secure mortgages, with sound underwriting and complete documentation of income and assets, and require risk retention only for mortgages with risky product features such as teaser rates and balloon payments, or with weak underwriting.

“As the leading advocate for home ownership, NAR firmly believes Congress intended to create a broad QRM exemption—strong evidence shows that responsible lending standards and ensuring a borrower’s ability to repay have the greatest impact on reducing lender risk,” said NAR President Ron Phipps. “The proposed rule should be withdrawn, revised and republished for public comment. If not, then millions of hard-working, creditworthy consumers will not be able to achieve their dreams of owning a home.”

NAR opposes the proposed 20 percent minimum down payment rule, asserting that it ignores evidence that responsible lending standards and assuring that a borrower is qualified to repay the loan have the most decisive impact on reducing lender risk.  As a comparison they reference the low foreclosure rates among Federal Housing Administration and Veterans Administration loans, which offer the lowest down payment requirements and maintain relatively low default rates, to further reiterate that safe lending can be established through sound underwriting and documentation rather than high down payments.

If the proposed rule were to be approved, NAR estimates that it would take more than a decade for a family with a median income to save enough money to meet the 20 percent down payment requirement.  Even at a 10 percent down payment requirement, it would take a family more than eight years to save enough money.  This could severely impact the buying power of minority and first-time home buyers.

Overall there is widespread opposition to the regulators’ proposed QRM rule.  Banking, housing and consumer advocacy groups have joined forces to create the “Coalition for Sensible Housing Policy”, which includes 46 organizations and is focused on drawing attention to the proposed regulation.

If you feel strongly that this new rule could negatively impact the economy, please write a letter to your Congressional representative.

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